CASH BACK AT CLOSING

By Danielle Pierce

During 2007, a big to-do was made with regard to all the so-called foreclosure scams being perpetrated on unsuspecting homeowners. Additionally, it seemed as if nearly anyone could go out and buy property and receive tens of thousands of dollars back at the closing table. During the summer of 2007, several lending companies, appraisers, Realtors, and attorneys were actually arrested and charged with fraud. Given the tightened lending market that has arisen over the past 12 months, it seems as if cash back at closing is a thing of the past. This article will address the legal issues surrounding cash back at the closing table.


 
Interview with a Real Estate Attorney
I was able to interview a highly skilled and experienced real estate attorney with regard to this issue. In her opinion, cash back at closing is not illegal in and of itself. However, the amounts that lenders are allowing the buyers to receive have been severely restricted. In terms of the legality of the procedures, all funds must be accounted for on the HUD-1 (settlement statement) or it is deemed illegal. So, her advice to anyone buying property is to make sure that if the seller promises you a certain amount of funds for purchasing the property, you MUST make sure that it is fully disclosed on the settlement statement. If a buyer receives any funds outside of the closing table, he/she has just committed fraud.

Interview with a Rehab Lender
Per a conversation with a national rehab lender, cash back at closing is NOT illegal in all circumstances. In some cases, a buyer may be able to receive tax credits from the seller in the form of actual cash. Also, in his experience, the seller is usually allowed to pay closing costs associated with the buyer's loan. Typically, such seller credits are limited to 3-6% of the purchase price.

The upside of seller credits is that it makes it easier for sellers to unload property. The potential downside of seller credits, from a lending perspective, is that it dramatically increases the potential for loan default. Think of it this way, if a buyer is able to purchase a property and essentially bring no money to the closing table because the seller has agreed to pay all costs, that buyer has NO financial interest vested in the property. In the event of foreclosure or default, the buyer could be more likely to just abandon the property since he/she never had anything to lose in the first place.

The lender also pointed out that buyers should not be able to profit from simply acquiring a piece of property. Some investors are still advertising properties for sale with up to $50K back at closing. In a worst case scenario, an individual may be able to buy four properties and potentially receive $200K and walk completely away from all of the properties. After all, the individual already has $200K cash. Why worry about paying the mortgage? To further complicate matters, sometimes that lump sum of money that is offered back at closing is the result of an inflated appraisal. As an example, if a property that is worth only $200K is appraised to $250K, that $50K that the buyer has just received is the result of a fraudulent appraisal. So, when that buyer goes to refinance or sell the property, he/she is unable to do so once the true market value is uncovered.

To sum it up, the lender feels that cash back at closing can be instrumental in certain real estate transactions if used properly. However, care must be taken so that fraud is not unwittingly committed. In his advice, it is best to keep all transactions above board. Buyers should take care to only buy what they can comfortably afford and not enter into a transaction to buy a property for the sole purpose of making a profit.

Interview with a Conventional Lender
During the course of an interview with a conventional lender affiliated with one of the nation's largest banks, her responses to the cash back at closing issues essentially mirrored the responses above. In her experience, cash back at closing is limited to verified borrower expenses such as earnest money, builder deposits, upgrades, etc. She states that no other cash can be received as a result of the purchase. Additionally, the amount of seller credits is contingent upon the specific loan program for which a particular borrower is approved. As a result of the current market environment and tightened financing, she generally does not encourage her buyers to believe that they will get cash back at closing.

The Bottom Line
Offering cash or other incentives to a buyer in order to induce them to purchase a particular property can be perfectly legal. It is important, however, to make every effort to not cross the line from seller incentives to outright fraud. As stated above, buyers should not expect to make a profit upon the purchase of real estate. As with most things in life, including real estate, “if it sounds too good to be true, it probably is.”

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Danielle Pierce is an investor and licensed real estate agent with Williams Realty and Investments. She specializes in Time Management, Money Management, and Wealth Creation through multiple streams of income. She can be reached at 773-551-4769.

HAL LONDON INTERVIEW

If you ever wanted to meet a successful, down to earth, compassionate investor, then Hal London would be the guy. I came in contact with him while taking the appraisal course at the Chicago Association of Realtors. In the class, I was impressed with his level of knowledge and experience, and in person he did not disappoint. I can honestly say that the time spent during the interview with Mr. London was definitely a delight. He is truly a special individual and I feel privileged to have had the opportunity to be in his presence. He has a proven track record, is a genuinely overall nice guy, and houses a wealth of experience and knowledge in the real estate arena. He's definitely someone I feel our readers should know.



Mr. London is the President of Key Appraisals, an appraisal firm which specializes in residential, commercial, industrial, agricultural and special purpose valuations of real estate in the northern two-thirds of Illinois. He has several active appraisers in his firm and multiple locations throughout the area. He has served as an expert witness in various court cases, is a founding member of the National Association of Realtors Appraisal Section, President of Key Realty, a real estate consultant and land developer/builder. Mr. London also holds a Bachelor's degree from the University of Illinois and a Master's degree from Loyola University. I believe it is safe to say that he is a qualified candidate to share with you here.

Mr. London was introduced to real estate at a very young age by his father who was a successful, self-educated builder. In fact, he credits his dad as his mentor, having a huge impact on his success. He began investing in real estate in the late 1970s, buying and developing new land. Like his father, he chooses not to utilize banks to finance his ventures; instead he presents opportunities to friends and acquaintances. For example, he is currently working on a new construction project in the hot Bucktown area. He has successfully secured valuable land with zoning to construct a 3-unit condominium dwelling. An opportunity is being prepared for interested investors, offering 7% interest on monies invested and a 10% share of all profits within an 18-month term. As you can see, this is a rather aggressive investment offering huge benefits to all parties involved.

During our conversation, I asked Mr. London how his understanding of valuation has been beneficial to his investment ventures. He stated, “who better than an appraiser can determine what something is worth.” In fact, he suggested that all investors in general should consider taking appraisal classes and/or have a basic understanding of appraisal methodologies. He added that it is important for investors to learn the concept of value. Not to mention, as an appraiser, he's out on the streets directly seeing opportunities first hand. In his eyes, his profession puts him in the perfect position. We've all heard the saying, “being in the right place at the right time.” After all, timing is everything in real estate.

Also while on the subject of property value, Mr. London commented about the correlation between it and society’s perception of the current real estate market. He stated, “something is only worth what someone is willing to pay,” which is one of the key elements when determining value. Like appraisers, investors must be able to read and understand not only the effects of economic factors, but those of psychological factors as well. This is especially true in today's market where it is almost impossible to calculate risk. We are at a point where economists are struggling to predict where the overall real estate market is heading. He proposed the question, “have we reached the bottom yet?” And answered, “who knows, only time will tell.” He went on to talk specifically about the wonderful job Mayor Daley has done revitalizing Chicago through aggressive zoning changes and fast track programs. He referenced the fact that Chicago has had a steady appreciation growth in property values over the last 15 years. In 2005-06 the values hit a plateau. Some areas dropped while others remained stable. He proposed another question. “Will we see the same changes in the values of real estate as those on the West Coast?” And responded once again, “I don't know, only time will tell.” He stands strong with the belief that it is extremely hard to speculate with all the factors that we are facing in this current market. This makes investing decisions and options even more difficult to determine. As a matter of fact, he believes that the best investment at this point and time just may be a savings account.

However, I was able to pull out of him what he considered to be the best possible real estate investment in today's market. He suggested strip centers. He likes the concept that there are minimum maintenance costs, triple-net leases, and low expenses. He was sure to add a caution statement about the importance of location, location, location. He stated, “investors considering strip centers must be aware that those in high economic base areas are struggling from tax hikes and those in areas of low economic bases are struggling from the lessee's inability to pay rents. The strip centers that are holding stable are those that are completely in the middle (economically) of the two. They generally have 5-6 units, 1200-1500 square feet per unit, and plenty of parking.” Yet like any other investment, it is vital that you do your research and know what you are signing up for. It is also important to remember that the commercial real estate sector is different than the residential market. In all thy getting, get understanding.

In addition, Mr. London offered the following advice to both new and seasoned investors, “Study each potential venture carefully. When you think you know which route you are taking, go back over it in a different direction.” He advises to always have a defined exit strategy. Investors should compile a list of all the things that could possibly go wrong and define a contingency plan for each item on the list. If he/she cannot come up with a contingency option, then the investor may want to consider that the venture is not a good investment. Lack of planning and preparation is where many new investors fail. They jump in with limited resources and they lack deep pockets. So when one thing goes wrong, it is detrimental for them. They are essentially out of the game before they've even gotten started.

Toward the conclusion of our conversation I inquired why Mr. London chose real estate. His response was simply because he enjoys it. He told me that he gets gratification in what he does. He likes to be in a position to help other people and to make a difference. He stated that he is a problem solver and in situations where he sees something wrong, his direct response is to find a solution. I'm a true believer that everyone has a purpose here on this earth. And in that purpose is where we find true happiness and it leads us into our wealthy place. Many people go to their grave never fulfilling their purpose, and I honestly think that Hal London is definitely not one of those people. He has found his purpose and is living the life that was meant for him. I only pray that I, too, will be able to experience the same in my life someday. Happy investing and remember - Knowledge Without Action Is Useless.

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For more information on Hal London of Key Appraisals, visit www.keyappraisals.com

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